Economy/Economic Policy

Tax Watchdogs for Seniors Momentarily Relieved

By Sharon Johnson

WeNews senior correspondent

Wednesday, January 9, 2013

The payroll tax holiday provided a middle-class tax break yet Social Security advocates worried that it represented a hidden threat to the bedrock of older women's retirements and are glad to see it go.

Credit: 401(K) 2013 on Flickr, under Creative Commons (CC BY-SA 2.0).

(WOMENSENEWS)--Some women's advocates welcome the expiration of the two-year payroll tax holiday Dec. 31 because they say it ends a risky phase of financing for a public retirement system that women can't afford to lose.

However, more battles are yet to come. The House Republicans have sworn to find cuts in social programs, including Social Security, when Congress meets during January and February.

"The payroll tax holiday was dangerous because it changed the way Social Security had been financed for 75 years," said Amy Shannon, policy director of the Washington-based Older Women's League, known as OWL, a grassroots organization that focuses on issues unique to women as they age. "Instead of workers and employers contributing all of the funds, part of the worker's share came from general funds allocated by Congress."

Had the holiday continued, Social Security might have had to compete with other government programs for funding, Shannon said. "At some point, Congress might have decided to spend the money on the military or some other program, jeopardizing the financial underpinnings of Social Security."

Shannon describes Social Security as the bedrock of older women's financial security. "Three out of 10 older women living alone receive virtually all their income from Social Security, so paying a few more dollars in payroll taxes during one's working years is a good deal," she said.

A worker's share of Social Security tax will increase to 6.2 percent on the first $113,700 in wages earned in 2013 from 4.2 percent. A worker earning $30,000 a year will pay $600 more in taxes in 2013. Those making $50,000 will pay $1,000 and those at the top of the scale, $2,200 more.

Smaller Checks

The average Social Security benefit for women 65 and older was $12,700 compared to $16,700 for men in 2012, according to the National Women's Law Center. Women received smaller checks because they had lower wages and often took time out of the labor force for care giving.

Congress' decision not to extend the payroll tax holiday for another year was a defeat for pro-business groups, which had claimed that it was needed to stimulate the sluggish economy.

Studies found that the payroll tax holiday generated only $1.09 in economic activity for every dollar the government didn't collect, compared to $2.15 for every dollar the government paid out in unemployment compensation.

"The holiday proved far less effective than other stimulus measures enacted in 2010," said Terry O'Neill, president of the Washington-based National Organization of Women, the largest feminist organization in the nation. "Higher income workers tend to save money rather than spend it on basic necessities the way unemployed and low-wage workers do."

The end of the payroll tax holiday, however, does not end the uncertainty over Social Security in 2013, when bigger battles over the program's future loom when Congress meets during January and February.

Angry that the New Year's deal to avoid the "fiscal cliff" -- the series of tax increases and spending cuts to reduce the country's deficit--relied heavily on raising taxes, Republicans have vowed to emphasize spending cuts in entitlement programs.

"Social Security will be front and center in the negotiations, even though it is a self-funding program that has not contributed one cent to the deficit and has sufficient funds to pay full benefits to every American for the next 25 years," said Max Richtman, CEO of the Washington-based National Committee to Preserve Social Security and Medicare, which helped stop the George W. Bush administration from privatizing Social Security in 2005.

Republican Call for Change

In addition to decreasing benefits to new retirees, Republicans have called for increasing the age for full benefits to 69 from 67. Some also want to replace the current formula for cost-of-living allowances, or COLAs, for beneficiaries with a "chained" cost of living price index, which is based on a formula that takes into account that when faced with higher prices, consumers change their buying habits by substituting less costly goods for expensive items.

"The 'chained' formula would be disastrous for older women who tend to live longer than do men and have outlived their other financial assets," Richtman said. "The typical 65-year-old would lose about $130 a month in benefits. That might not sound like much, but by the time that senior reaches age 95, the annual benefit cut would be almost $1,400, a 9.2 percent reduction from the current scheduled benefits."

To ensure Social Security's long-term solvency, advocates for women will lobby Congress to require higher income Americans to pay Social Security taxes on all their income. Presently, they only pay taxes on the first $113,700.

Until the 1980s, the cap was high enough to tax about 90 percent of all wages. But as income inequality has grown, Social Security has captured a smaller share of income, so that fewer funds are deposited in the trust. Eliminating the cap altogether would make Social Security solvent in perpetuity.

"A record number of women were elected to the 113th Congress, 81 women in the House and 20 in the Senate," said Richtman. "This is good news for Social Security because women tend to be more supportive of measures to protect Social Security because they realize that without Social Security almost half of women 65 and older would be poor."